Why Are Administrative Costs So High?

International health system data reveals that the United States stands out significantly in terms of administrative spending. The U.S spends over four times more on administration per person than in comparable countries: $937 compared to $201 per person, respectively. Roughly half of administrative spending comes from the cost of private health insurance, while the other half is attributed to governmental programs such as Medicare and Medicaid. 

Researchers suggest that some of this high spending may be due to the American healthcare system’s focus on choice. Generally, Americans are free to choose which insurance plan they purchase and which doctors they will visit. This proliferation of choices complicates processes such as billing and enrollment, leading to higher administrative costs. Many of the routine tasks within these areas – such as fraud detection, payment forecasting, and drug-cost anomaly detection – could be automated with AI.

Administrative Costs, Medicare, and Medicaid

Medicaid is the joint federal and state program providing health and long-term care coverage to low-income individuals in the United States. In 2023, over 85 million individuals were enrolled in Medicaid. Medicare is the federal program providing health coverage to adults 65 or over and individuals with certain disabilities. At the beginning of 2024, nearly 66 million people were insured by Medicare. Together, Medicare and Medicaid insure approximately 45% of Americans.

The Centers for Medicare and Medicaid Services (CMS), which administers Medicare and Medicaid, has a huge influence on the US healthcare system. For example, Medicare sets what it considers to be a “fair price” that it will pay for medical procedures, and private insurers often base their payment rates off Medicare’s prices. Research shows that even a $1 change in what Medicare pays for a procedure causes private insurers to increase their prices by an additional $1.30. 

This process of constant insurer–provider negotiations over payments comes with major consequences. For Medicare specifically, CMS reported an $11 billion dollar expenditure on administrative costs in 2022. But it’s not just CMS that incurs administrative expenses. In 2022, CMS paid just 82 cents for every dollar spent by hospitals caring for Medicare patients, including administrative costs. Due to this underpayment, 67% of hospitals incurred more costs on Medicare patients than CMS paid for.

What could AI do to help? 

AI is at the forefront of the conversations surrounding administrative costs. Several studies have shown that organizational integration of AI can improve employee productivity, cut labor costs, and optimize task management. Healthcare could join this trend and reap the benefits. Utilizing AI could simplify access to benefits for millions by eliminating the need for manual oversight and procedural assessments. Administrative delays often leave many individuals unable to access their benefits and tie the hands of healthcare providers. An automated system could increase accessibility, decrease wait times for beneficiaries, and lower costs for providers. 

For Medicaid specifically, AI holds the potential to prevent improper payments caused by missing information. Such errors impose a considerable financial strain, amounting to $80.57 billion in 2022.

The National Bureau of Economic Research suggests that by harnessing existing AI technologies, healthcare spending could see savings of up to $200–$360 billion within the next 5 years.

A Need for Clear Policy Recommendations

While AI technology shows great promise, it remains a work in progress. Even the more advanced technologies are prone to inaccuracies due to issues like poor quality training data or algorithmic bias. Given these limitations, AI is currently being utilized as a tool for empowering individuals rather than autonomous function.

As the use of AI continues to expand, and the potential for autonomous functionality grows, there are ongoing efforts to provide guidelines and recommendations for its use. Initiatives include issuing general guidance for AI adoption from CMS, improving regulations in areas where AI is most needed, and maintaining regular updates to accommodate the fast-evolving tech landscape. Policymakers must collaborate to harness and implement AI technologies not only to enhance the efficiency and effectiveness of programs like Medicaid and Medicare, but also to ensure ethical, secure, transparent, and human-centric application.